When a Steel Deal Isn't Tempered for D.C.

Nippon Steel's Bid to Buy U.S. Steel and the Disastrous Absurdities of Politics

With the Harris-Trump presidential debate just hours away, it's the perfect time to discuss a particular episode that I’ve been meaning to bring to your attention.

Now, I'm not going to pretend this is going to be a hot-button issue tonight... but it really encapsulates the current state of American politics and how both of the parties are in many ways just two sides of the same coin.

And it all revolves around a little something called steel.

A $14.9 Billion Bet on American Steel

Roughly a year ago, Japan's steel giant Nippon Steel (TYO: 5401) made an offer to acquire its struggling American counterpart, U.S. Steel (X).

The primary reason behind Nippon's desire to buy out U.S. Steel can be summed up in one word: China.

For years, Nippon's margins have been suffering from competition with Chinese steelmakers. The company has been trying to stay afloat in a sea of cheap Chinese steel. Much like U.S. Steel...

Enter Nippon’s proposed $14.9-billion takeover.

The deal would inject $2.7 billion to refurbish the Pittsburgh steelmaker's aging plants. It would create a stronger entity with reduced costs, increased efficiency, and higher market share to compete against Chinese manufacturers, who benefit from lower wages, fewer labor restrictions, and government subsidies.

A company from a trusted ally swoops in to buy your ailing firm to compete with your main geopolitical rival. What’s not to like?

Good Deal, Bad Politics 

Apparently, quite a bit, according to the Biden Administration.

As I write this, President Joe Biden is preparing to announce that he will formally block Nippon Steel's proposed $14.9 billion acquisition of U.S. Steel.

Their stated reason is as puzzling as Biden's never-ending gaffes: "national security concerns."

Now, unless you've been living under a rock, you probably know that Japan has been one of America's closest allies for decades. And it's becoming an increasingly important one as the U.S. relationship with China grows more adversarial. You'd think Biden would have moved past the whole Pearl Harbor thing by now.

And it doesn't help that Nippon's deal is actually very generous—more than twice the current market capitalization of U.S. Steel. Or that it agreed to honor U.S. Steel's collective bargaining agreements with the United Steelworkers.

As you might have guessed, the actual reason for blocking the merger has little to do with national security.

You see, another U.S. steel company, Cleveland Cliffs (CLF), submitted a rival bid to acquire U.S. Steel for roughly half of Nippon's offer. Yes, you read that right—half.

It just so happens that Cleveland Cliffs' CEO, Lourenco Goncalves, is a staunch union advocate and a friend of the Biden Administration. He aims to create a domestic cartel protected from competition by the 25% steel tariffs (originally imposed by Trump and maintained by Biden).

So, needless to say, the administration likes this deal better, despite the steep discount.

Goncalves has been pushing the narrative of a national security threat, even going so far as to say that "Japan is not a friend."

The upshot? The Nippon Steel deal is as good as dead at this point...

This means Cleveland Cliffs will probably scoop up U.S. Steel at a huge discount, thanks to its CEO's political connections, and we’ll end up with a genuine steel monopoly in the U.S.

Political Look-alikes

So, instead of preventing monopolies, the Biden Administration is actively helping to create one... And rather than upholding the principles of open markets — yes, I know, shocking — they're wholeheartedly embracing economic protectionism.

But that’s to be expected from the likes of Biden and Kamala.

What’s more surprising is that Donald Trump and JD Vance are also against Nippon's acquisition of U.S. Steel. In fact, Trump himself promised to block the deal back in January.

It's frankly mind-boggling; Nippon is ready to invest billions in America to revitalize its aging steel industry and make it more competitive. Yet politicians on both sides of the aisle are lining up against it.

This will definitely make other foreign companies think twice about investing in the U.S.

But the bigger picture here is even more significant. For decades, the U.S. has been a proponent of free trade and open markets, based on the (accurate) belief that they create wealth for investors, keep prices low for consumers, and generate jobs for the working class.

The pushback against the Nippon Steel deal hints at a major shift in that mindset… not that it has been on solid ground lately anyway.

And, again, it's coming from both sides of the political aisle... something Trump and Kamala would no doubt confirm in tonight's debate if asked.

Time and again, we're reminded: on the issues that really count, both sides couldn't be more alike.

Regards,

Lau Vegys